Bull of the Day: Qihoo 360 (QIHU) - Bull of the Day
September 24 2013 - 3:50AM
Zacks
Looking for the next Internet search portal to take market share
from Baidu (BIDU)? Look no further than Qihoo 360 Technology
(QIHU).
Qihoo 360 is the largest Internet security provider
in China, with over 461 million monthly active users, representing
a penetration rate of 96% in arguably the world's largest web
market. That's right. You are talking about the largest
common-language/culture Internet market in the world and QIHU is
now the #2 portal.
With that kind of access to the Chinese market, why
haven't we heard of this $7 billion upstart before as a threat to
Baidu? And where does the search element come in?
The Story is Out
Qihoo 360 Technology offers a broad spectrum of
Internet and mobile security products. Its core Internet and mobile
security products include 360 Safe Guard and 360 Anti-virus 360
Mobile Safe, 360 Safe Browser, 360 Personal Start-up Page, 360
Application Store and 360 Safebox.
In a brilliant strategy move, Qihoo 360 began
offering its cloud-based Internet security products for free to
users. And this has allowed them to monetize their significant
audience through online advertising services, including paid links
as well as Internet value-added services, such as offering access
to third-party Web games and virtual items.
More recently, the company's launch of so.com, its
Internet search engine, is the game-changer for the company as it
leverages its broad reach in China to capture lucrative search
market share. The “360” brand stands for Internet security to the
company's users, and these users are a ripe audience for
advertisers.
Take a look at how savvy (and China-connected)
investors tripled QIHU shares in the past 5 months after the launch
of so.com, once they realized the growth potential...
Mobile Search and Gaming
Earlier this month, the company launched 360
Yingshi Daquan, the mobile version of 360 Video, Qihoo’s video
vertical search engine. 360 Yingshi Daquan is a 360 mobile app that
enables users to search for and view videos from Qihoo partners on
Android based smartphones.
Like Qihoo's 360 Mobile assistant, the new mobile
app will serve as a mobile traffic hub for the company, attracting
mobile users who ultimately can be monetized by the company.
According to CNNIC (China Internet Network Information Center),
during the first half 2013 there were 160 million Internet users
accessing online video using mobile devices in China, a 34.4%
utilization rate. As mobile devices evolve with new technologies
including larger screens, video will continue to be in great demand
among mobile users.
What else do Chinese PC and mobile users rely on
Qihoo 360 for? Gaming! Here's how one analyst characterized the
growth potential...
"We believe Qihoo possesses a solid mobile search
entry point supported by the strong distribution capability of its
app store which is ranked no. 1 with 21.6% market share by number
of times used in July, according to iResearch. For example, number
of downloads of “Plant vs. Zombie 2” reached 10mn in 36 hours on
360 mobile assistant, compared to 25mn downloads in two months on
iOS app stores."
Rich Valuation, Compelling Opportunity
There is no doubt that QIHU shares ran quickly to
near full valuation (average analyst target price is $100) once the
story was out that they were grabbing significant search engine
traffic from Baidu. The leader currently owns over 60% of the
market, while the newcomer is pushing 20%.
I recommended this stock 3 weeks ago in the low
$80's as an aggressive growth and trading opportunity. It traded
back above $90 and has since come off a bit. For investors, keep an
eye on the earnings momentum. After their last earnings report,
which beat consensus estimates by 100% (just like the previous 3
quarters!), analysts bumped next year from $1.26 to $1.55 -- that's
80%+ year-over-year growth.
At $85, that's also a forward P/E of 55X. But if
the aggressive growth trends of QIHU keep muscling in on Baidu's
turf, this company may sustain that multiple.
Kevin Cook is a Senior Stock Strategist for
Zacks where he runs the Follow The Money portfolio.
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